FAR/BAR Contract Updates: Volume 3-Section 8

This week’s contract updates are focused on the financing section of the contract and primary discuss the changes to the financing contingency. A copy of the redline version of the contract is available here, https://berlinpatten.com/wp-content/uploads/2021/10/03843547.pdf for reference. With the uptick of appraisal related issues that we have seen in the last year, it is no surprise that changes have been made to how appraisals are handled, including the timing in which the appraisal needs to be completed.

The most notable changes are below:
8(a) – This subsection remained substantially the same, the language is streamlined to be more concise in confirming that a Buyer is opting to pay cash for their purchase with no financing contingency.
8(b) – This subsection outlines the financing contingency including the rights and responsibilities of both the Buyer and Seller. The most significant change is to the definition of “Loan Approval”. In this new version the buyer, within the Loan Approval Period (typically 30 days), needs to (1) obtain approval of a loan that meets the criteria outlined in Paragraph 8 (b) and (2) obtain an appraisal that meets the terms required by the lender to provide financing to the Buyer. A buyer no longer has the ability to receive an appraisal after the end of the loan approval period and still have the ability to terminate the contract based on the value of the appraisal being insufficient to meet the terms of the buyer’s loan approval letter. This portion of the Buyers (and lenders) due diligence must now be completed within the Loan Approval Period.

Additionally, a Loan Approval that required a Buyer to seller other real property will not be considered Loan Approval unless the “Sale of Buyer’s Property” Rider is attached to the contract. If you have a Buyer who would like to ensure they can provide an affirmative answer at the end of the Loan Approval Period about their Approval, it will be important to include the rider as part of the Contract.

As with the current version of the contract, if the buyer does not receive Loan Approval they can deliver written notice of termination to the Seller prior to the expiration of the loan approval period, in which event the Contract shall be terminated. It is important to note that in the new version, if the Buyer does fails to deliver timely notice, then it is assumed that the Buyer is moving forward with the transaction as if it was a cash transaction. Keeping in mind that if the Buyer does not deliver timely notice to the Seller of their Approval, the Seller may elect to terminate the Contract as well.

These changes place a greater burden on the Buyer to timely provide information, pay for the appraisal or other fees that are required in connection with the Buyer’s application for Financing to ensure that they obtain Loan Approval. A Buyer’s failure to use good faith and diligent effort to obtain their Loan Approval is considered a default under the contract, and may allow a Seller to keep the Buyer’s deposit in the event the Buyer attempts to terminate the contract as a result of not obtaining Loan Approval. With the condensed timeframe, it will be important to ensure Buyers are aware of their obligations upfront and prepared to handle each requirement diligently as the requests are received from their lender. It is also imperative to ensure that the Loan Approval Deadline, included in the Contract is a realistic date based upon how quickly the Buyer and their lender are able to get the necessary items for Loan Approval.

Our subsequent blogs will address other changes to the contract, however, if you have any questions in the meantime, we encourage you to reach out to your trusted real estate lawyer.

Natasha Selvaraj, Esq,nselvaraj@berlinpatten.com
Berlin Patten Ebling, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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